GREEN FINANCE

Paving a new path to green growth – Kiran Dhanapala

There is a scientific consensus that the world urgently needs to transition towards a radically different growth path that’s sustainable and low carbon in line with scientifically validated global emissions.

However, this transition carries risks, which include many interdependent factors related to climate impacts, money and financing, and people and politics.

The goal of net zero emissions by 2050 is a cost as well as an opportunity. This duality means resolving the net zero equation and managing the climate change crisis with a need for resilience such as with clean affordable energy.

For top CEOs, this is seen as positive ROI investment opportunities.

Green finance (GF) includes financial products and services that are designed to support environmentally sustainable projects, activities and businesses. It involves using financial tools and instruments – such as loans, bonds and insurance products – to support investments in renewable energy, energy efficiency, green infrastructure construction, sustainable agriculture and other environmentally-friendly activities.

And it covers many sectors including forests, oceans and land.

GF aims to tackle the challenge of climate change and promote sustainable development. It has become increasingly important as governments, investors and businesses seek to transition to a low carbon economy and reduce their environmental impact.

And green finance helps mobilise private capital to sustainable projects, and create new opportunities for businesses and investors.

Countries that have pledged to uphold the Paris Agreement through their own climate related actions design their respective nationally determined contributions (NDC) plans as public road maps to ensure accountability. These are also transition road maps for banks and financial institutions for business opportunities in GF.

Green finance examples include green bonds, which are used to finance environmentally-friendly projects, and green loans that offer preferential terms to borrowers who invest in sustainable projects. Other examples include carbon credits, green insurance products and sustainable investment funds.

There are many trends in GF. First, there’s an increasing demand for green finance products and services driven by the desire to address climate change, reduce environmental impacts and meet sustainability goals.

Secondly, innovation is driving the GF space with new financial products and services being developed to support sustainable investment – green bonds, green loans, sustainable investment funds and so on.

Thirdly, there’s increased regulation with regulators taking action to encourage, support and regulate the GF sector. Some countries have introduced tax incentives for green investments or mandated that institutional investors disclose their exposure to climate risks.

Fourth, there’s greater integration of GF into mainstream finance. It means that sustainable and socially responsible investments (SRI) are no longer niche but a core part of the financial system.

And finally, there’s growing recognition that collaboration is the key to driving the growth of GF. Stakeholders across the financial system are increasingly working together to develop new products, share best practices and create more sustainable investment opportunities.

Green finance in Sri Lanka needs collaboration by multiple stakeholders including policy makers and regulators. To this end, we have the Roadmap for Sustainable Finance developed by the regulator and a GF taxonomy.

A taxonomy is a classification tool that aims to clearly define the environmental performance of economic activities across a wide range of industries and sectors, and sets requirements for corporate activities that must be met to be sustainable.

It can be used by investors, businesses and financial institutions (FIs). The tool provides clarity on which activities and assets can be defined as green, and is vital to the scaling up of green and sustainable finance. A taxonomy also helps drive capital more efficiently towards priority sectors and projects.

However, the devil is in the details. Taxonomies must be developed in consultation with stakeholders to ensure country context relevance and suitable thresholds, which should be clear to everyone.

For example, financial institu­tions don’t recognise green products such as rainwater harvesting (RWH) for retail loans.

Homeowners and businesses need to be able to easily approach FIs for such alternative water supply and efficiency solutions – especially in times where water rates are escalating. Its suitability has been assessed and recommended for use in Wet Zone areas where rainfall is sufficient to refill domestic RWH systems.

Green finance is being used increasingly in China and across Europe with the US also catching up. Furthermore, developing countries such as India and Brazil are introducing GF supportive policies to encourage this form of sustainable financing.